Telefónica to exit Telecom after Brazil deal

The sale of Vivendi’s broadband business GVT would reduce tensions between the firms

SANTANDER, Spain — Telefónica plans to exit Telecom Italia once the Spanish group has finalized the purchase of Vivendi’s Brazilian broadband business GVT, ending a long-standing shareholding and easing competition concerns in Brazil.

Tense relations between the Spanish and Italian companies came to a head last week when Telefónica beat Telecom Italia to buy GVT, a blow for the latter that could make it a takeover target in a fast-consolidating industry.

Telefónica has taken steps in recent months to reduce its stake in Telecom Italia, which it owns through holding company Telco. It will hold 8.3 percent of voting rights in the company once it converts a three-year bond exchangeable into Telecom Italia shares.

It offered Vivendi those remaining rights as part of its cash and shares bid for GVT last week, worth 7.45 billion euros ($9.8 billion), signalling that it was ready to cut ties with Telecom Italia.

Telefónica had said it would issue 3.4 billion euros in new shares to help to finance the cash element of the GVT deal, but Alierta said it could also use shares held as treasury stock if market conditions make a capital increase too difficult.

“We’re not worried about financing the GVT deal. Obviously, we can use our treasury stock for certain things ... and if markets get hysterical because Russian tanks are entering Ukraine, that’s not our shareholders’ fault,” Alierta said.

Winning the auction for French media company Vivendi’s GVT was vital for both Telecom Italia and its rival, Spain’s Telefónica, as their European markets have been shrinking. Italy was gripped by a mobile price war for much of last year, revenue is falling and competition remains tough.

The value of Telefónica’s shares in Telecom Italia have plummeted by almost 70 percent since it entered in April 2007. A consortium made up of Telefónica and four Italian firms acquired a 23.6 percent stake in Telecom Italia for around 4.1 billion euros, valuing Telecom Italia’s shares at 2.82 euro per share.

“At least Telecom Italia will truly be independent now from Telefonica, ending the complicated relationship between the two companies,” said Carlos Winzer, credit analyst at Moody's.

Regulatory concerns

Exiting Telecom Italia would help Telefónica to appease regulators over competition concerns in Brazil, its second-largest market behind Spain in terms of cash generation.

In December Brazilian antitrust watchdog CADE gave Telefonica 18 months to either sell its interest in Telecom Italia or seek a new partner for Vivo.

Italy’s Intesa Sanpaolo, Mediobanca and Generali formed holding company Telco in 2007 with Telefonica, aiming to fend off a takeover bid for Telecom Italia by US group AT&T and Mexican tycoon Carlos Slim.

While the move, which was strategic for Telefónica, succeeded in preventing a North American takeover of Telecom Italia, it turned into a loss-making investment.

Vivendi is now likely to accept the chance to take from Telefonica 5.7 percent of Telecom Italia shares, or 8.3 percent of voting rights, sources have told Reuters, and may also end up becoming the largest investor in the Italian company.

Analysts have speculated that Vivendi could later buy out the Italian investors, too.

The Italian partners in Telco have also said they would eventually sell their shares in Telecom Italia, which amount to a combined 7.6 percent stake.